Where Should Gold Be Based On
Inflation?
http://albertpeia.com/wheregoldshouldbebasedoninflation.htm
‘Since
the Financial Crisis erupted in 2007, the US Federal Reserve has engaged in
dozens of interventions/ bailouts to try and prop up the financial system. Now,
I realize that everyone knows the Fed is “printing money.” However, when you
look at the list of bailouts/ money pumps it’s absolutely staggering how much
money the Fed has thrown around.
Here’s
a recap of some of the larger Fed moves during the Crisis:
Cutting
interest rates from 5.25-0.25% (Sept ’07-today).
The Bear
Stearns deal/ taking on $30 billion in junk mortgages (Mar ’08).
Opening
various lending windows to investment banks (Mar ’08).
Hank
Paulson spends $400 billion on Fannie/ Freddie (Sept ’08).
The Fed
takes over insurance company AIG for $85 billion (Sept ’08).
The Fed
doles out $25 billion for the automakers (Sept ’08)
The Feds kick
off the $700 billion TARP program (Oct ’08)
The Fed
buys commercial paper from non-financial firms (Oct ’08)
The Fed
offers $540 billion to backstop money market funds (Oct ’08)
The Fed
agrees to back up to $280 billion of Citigroup’s liabilities (Oct ’08).
$40
billion more to AIG (Nov ’08)
The Fed
backstops $140 billion of Bank of America’s liabilities (Jan ’09)
Obama’s
$787 Billion Stimulus (Jan ’09)
QE 1 buys
$1.25 trillion in Treasuries and mortgage debt (March ’09)
QE lite
buys $200-300 billion of Treasuries and mortgage debt (Aug ’10)
QE 2 buys
$600 billion in Treasuries (Nov ’10)
Operation
Twist 2 (Nov ’11)
QE 3 ($40
billion in MBS monetization per month)
And
this is just a brief recap. I’m almost certain I left something out.
Indeed, between 2008 and today, the US Federal Reserve has grown its balance
sheet from $800 billion to almost $3 TRILLION in size (larger than the
economies of Brazil, the UK, and France).
The
Fed is not the only bank to engage in such profligate policies either. Thanks
to its bond purchases as well as its LTRO 1 and LTRO 2 schemes, the European
Central Bank (ECB) has in fact grown its balance sheet even larger than the
Fed.
|
Country |
GDP |
|
European Union |
$16 trillion |
|
United States of America |
$14.5 trillion |
|
China |
$5.8 trillion |
|
Japan |
$5.4 trillion |
|
European Central
Bank |
$3.8 trillion |
|
Germany |
$3.2 trillion |
|
US Federal Reserve |
$2.8 trillion |
|
France |
$2.5 trillion |
|
United Kingdom |
$2.2 trillion |
As a
result of this, inflation hedges, particularly Gold have been soaring. Gold
was, is, and always will be THE ultimate storehouse of value. Mankind was prizing
it long before the concept of stocks, mutual funds, or paper money even
existed.
So
with world central banks printing paper money day and night it is no surprise
that Gold is now emerging as the ultimate currency: one that cannot be printed.
Indeed, Gold has broken out against ALL major world currencies in the last ten
years. The below chart prices Gold in Dollars (Gold), Euros (Blue), Japanese
Yen (Red) and Swiss Francs (Purple):
Now, a
lot of commentators have noted that gold is already trading above its 1980 high
($850 an ounce). What they fail to note is that thanks to inflation, $1 in the
‘70s is worth a LOT MORE than a $1 today.
|
$1
in… |
Is
Worth Today |
|
1970 |
$5.49 |
|
1980 |
$2.58 |
For gold
to hit a new all time high adjusted for inflation, it would have to clear at
least $2,193 per ounce. If you go by 1970 dollars (when gold started its last
bull market) it’d have to hit $4,666 per ounce.
If you
do not already have exposure to Gold, consider getting some now. If you do
decide to buy, I strongly urge you to buy actual physical bullion
because it is not clear that the various Gold ETFs actually own the bullion
they claim to
On
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Phoenix Capital Research’